Is My Emergency Fund Too Big?

Isn’t personal finance exciting? I know, I know, it really is, and sometimes I can hardly contain myself. On Friday, I wrote a fun little piece called “Question Of The Week: Should I Pay Down My Student Loans ?“, and I got some great responses and answers from my awesome readers. As I was responding to the various comments and suggestion, I saw a common thread weave throughout, which was to obviously “PAY DOWN THE FLIPPIN’ LOAN!” The other one was a bit more interesting, and I’d like to explore it a bit further.

Why Do I Have So Much Cash Saved Up?

I got a few responses from readers asking why I have so much money saved up when I am still in debt and paying 6% interest on that debt. It’s a fair question, and I think Emily from Evolving PF had a response sums up the concerns of those readers the best: “Wait wait wait are you saying $6,100 is a SMALL emergency fund? While you’re in debt? And have other cash and accessible investments? I must have been listening to too much Dave Ramsey because I have no idea why you are keeping so much cash around while you still have these student loans!”

Now, if you’re not familiar with the Dave Ramsey 7 steps to financial freedom, here they are:

Save up a $1,000 emergency fund

Pay off ALL consumer debt

Save up 3 – 6 months’ expenses emergency fund

Invest 15% gross pay into retirement accounts

Max out college fund accounts for kids

Pay off mortgage early

Give generously, live freely

That’s sort of a paraphrase, but you get the idea. Based on this plan, Emily is correct in saying that $6,100 is FAR TOO MUCH cash money to have on hand doing NOTHING when I am paying 6% interest on my $13,700 in student loans. Not only that, but I have another $3,000 just sitting there, waiting to pay on the loans. But, before I can tell you why $6,100 isn’t very much, I have to tell you WHY I have an emergency fund, and why I think $1,000 is totally inadequate for someone in my situation.

Why Do I Have An Emergency Fund?

When Michelle and I first got married, we were ready to kick butt. And we did, because we’re awesome like that. We paid off a bunch of debt while earning only $14 an hour, and were on our way to becoming debt free. We redirected our priorities, bought a house, had a kid, and my wife is now a stay-at-home mother to our sweet boy. That was a lot of change in just 3 years, and being the conservative saver that I am, I put away as much cash as possible to make sure we were covered in case of emergency.

Now, we’re on a tight budget, but are getting by and enjoying life. We keep it frugal, scoring awesome deals where we can, keep our food budget low, and don’t have many luxuries outside of our home. Even with all of that, if I ever lost my job, things would come to a screeching halt, and suddenly we’d have a HUGE emergency on our hands. $1,000 would not last long, and we’d have to stop paying our mortgage, among other things, and would end up in a tough place VERY QUICKLY! I like to have a MINIMUM 3 month’s saved up, and that $6,100 doesn’t even cover it, so I would say that our emergency fund is SMALL for someone in my situation.

In the Dave Ramsey plan above (which I do like a LOT), he assumes you save your emergency fund, your pay off your debt, you save 3- 6 months’ expenses, THEN you buy a home. It’s not listed there, but having listened to his radio show a TON back in the day, he would always state this to people looking to buy a home. Since the 3 – 6 month emergency fund comes BEFORE the house, I’d say it is a REQUIREMENT to have when you are a homeowner, especially in a single-income household! Job loss or anything else cutting off your income for a few months at a time would absolutely CRUSH you, causing you to borrow or just stop making payments to get by.

What Am I Going To Do?

So, we’ve establish that I have a $6,100 emergency fund in cash, and another $11,000 in a Roth IRA (that I DON’T want to touch). I also have $3,000 in a savings account leftover from tax season earnings that I COULD throw at the student loans. Also, I will be selling a car soon for another $2,000 (this is a new development). But, for those of you that didn’t read my post yesterday, I also dropped this amazing bombshell:

Yup!

So, now what? Well, here’s what I am going to do. Today, I am going to send $3,000 toward my highest interest loans (6.8%). Done and done! Next, I am going to sell the car and put $2,000 into an account for Baby #2! WOOHOO! That is for out-of-pocket medical and other baby expenses (we paid a bit less than this last time, but just in case). Then I am going to keep rocking my budget, my side hustles, and look for any extra money each month to throw at these loans. I set a VERY aggressive goal at the beginning of the year to pay off the loans, and I still want to hit it. Sure, I need to find hundreds of extra dollars each month to make this happen, but I am motivated, and thanks to ya’ll, I’m taking a HUGE chunk out of these dang loans RIGHT NOW! So thank you, and look for updates as I tackle these dang loans to the ground. They used to look like a mountain, and now are looking like a day hike. Now, let’s see how well I can plow through the rest of it!

Edit: Quick update for everyone that’s curious. I made the payment. $3,000 will VANISH from my checking account today or tomorrow. WOOOHOOO!!!

Phew! I did it!

Comments: So, what do you think? Is my emergency fund too big, just right, or too small? Do you think I should be dropping the $3,000 on the loan today? Welp, too late on that one, lol! For you homeowners out there, how big is your emergency fund? Are you still in debt? I’d love to hear your stories and why your fund is the size that you have it at. Plus, does anyone know if baseball cards count as emergency savings? I’ve got over 8,000 sitting in the garage. Maybe I’m richer that I think??

Comments

While you’re in debt, it’s kinda tough saving up on an emergency fund. However, as long as you stay frugal and disciplined, it is still possible! I just paid off my loan and now I’m targeting at least a $7000 fund within the next 3 months.

I’m 100% on board with you here. Paying off the student loans might give you the best return on investment, but it decreases your family’s short-term financial security. Having a son myself (and congrats on #2 by the way!), security is far and away my top priority. I very much dislike the logic of credit cards or other debts as an emergency fund, so I don’t even consider those an option. I think your approach is spot-on and would be doing the same thing.Matt Becker recently posted..Teaching My Son Basic Money Skills

Thanks Matt! I like having a HUGE EF, but right now, even more so with the impending baby, but this $3k just needs to go on the loan so I can stop thinking about it. We don’t technically need it, so I don’t think I’ll miss it at all.

We have a large EF of around $15K. I am an extreme worrier and am always afraid that something might happen! However, if I wasn’t like this, then I would just throw all of it at student loans and them just be done with.Michelle recently posted..Should We Rent Our Home or Sell It?

Peace of mind is sometimes pricey! But worth it, IMO. Ideally, I’d love $20k saved up or invested conservatively for the purposes of emergency fund only, but while I’m in debt, it doesn’t make sense. I guess we technically have about that amount, but I don’t want to touch the Roth AT ALL if possible in case of emergency.

We have an emergency fund of about 10K. I’m with Michelle in that I am always worried that something terrible will happen and we’ll need to live exclusively on our savings. I’d also really like to increase that to 15K before we have children. I think especially having kids, you can never be too prepared for unemployment.Christine recently posted..Writer’s Block. It Hurts Me.

Are you in debt at all? I think 10K is a nice round number, but if you’re in debt, the question is: Are you earning more with your EF than you are losing in debt interest? Then, it becomes a question of risk tolerance. For me, I’m not willing to drop down to $1,000 EF just to pay off the loan. I need the security 🙂

I personally don’t think that 6k is a low emergency fund for all the reasons you pointed out, plus another kid on the way. Are you buying a new car after you sell your old one? Try to aggressively get to where you want to be with an e-fund and get to those loans!Budget and the Beach recently posted..Life Updates

My target savings account is $20,000. I worry a lot, and having that much money in my immediate savings account, allows me to not obsess over what may or may not happen.Savvy Financial Latina recently posted..Reviewing Your Professional Profiles

Personally I think the fund should be about 12 months of expenses, but I think that building that up is an ideal, and in the interim a smaller fund works well.

I like to pay down debt before saving, so that would be my route, but I can see the need to have that support layer in place as the family grows.Matt from Saverocity recently posted..Drop Shipping For Manufactured Spend, Day 2

Thanks Matt! And I agree as well, 12 months would be ideal, but I’d probably on have 1/3rd of that liquid so as to not have money earning >1% . We want to get out of debt VERY badly, but family comes first 🙂

I’ve read on another blog that I can’t remember off the top of my head where they were targeting 1-2 months expenses per household member. So with number 4 on the way that’d be 4-8 months. It really comes down to whatever makes you and your wife comfortable. If it was just me then sure I’d keep my e-fund around $1,000 even though I have no debt whatsoever. With a wife and children in the picture I can’t understand the worry and even more so since it’s a single income household. I think having a mortgage definitely raises the need for a larger emergency fund in the short term. And it’s not like throwing that $6,100 would clear the debt away right now. As you get closer to paying the debt off you can always use a chunk of your e-fund to get rid of the debt a bit earlier. That’s how I approached the debt I had. I was carrying a ~$6k e-fund and then when the money I had earmarked plus $2k from my e-fund would pay off the balance I just used that cash to free up my finances.JC @ Passive-Income-Pursuit recently posted..Weekly Roundup – May 25, 2013

Definitely revealing the pregnancy changes the equation on the EF vs. student loan payoff debate. Thanks for quoting me, though! I agree that was the consensus of the comments.

But I am going to quibble with you a bit on the DR philosophy here. I’m sure you remember from your days listening to his show that his primary audience is homeowners, so the $1k EF applies to current homeowners for sure. It’s only people who aren’t yet homeowners who DR expects to save their full EF before their down payment.

But also I’ve heard DR say many times that you put the accelerated debt payoff on hold during pregnancy. So according to him you’re off the hook for paying the student loans down faster until after the baby arrives.

However, I am not a DR follower, so I think there is room for nuance here. We also keep “savings buckets” (we call them targeted savings accounts) and I know that they add a huge volume to our cash on hand. We actually have a very small emergency fund that we have never had to use because we anticipate the events that most other people call emergencies (unexpected travel, car repairs). So I think you should try to take the money have you have in your savings buckets into consideration when you calculate your target EF size (not count them fully toward it, but partially). Do you have a home repairs savings bucket?

However I think your thoughts about all these scenarios really come down to your income. Are you still supplementing your income with savings or are you in the black now? If you lost your job, what is your anticipated time of unemployment or could Michelle find a job quickly? If you are familiar with Elizabeth Warren’s The Two Income Trap, you know that a stay-at-home mom is a valuable security asset for a family – but only if she is willing to enter the work force if her husband becomes unemployed. You could always swap back when you find a job. If there are no circumstances under which she would work for pay, you have created a one-income trap, which is even worse than a two-income trap because you are less diversified in income.

If you paid off your debt, your monthly nut would be smaller and you would feel even more secure because you would have more wiggle room in your budget, would you not? Something to think about, perhaps now or perhaps after the baby is born.Emily @ evolvingPF recently posted..Pulling Back the Veil on Our Daily Money Management

Technically, we are in the black, but ONLY with side income and carefully budgeting out the tax season earnings and two extra check a year. And yes, we’ve got about $600 in savings buckets right now, so I could throw that on the pile as well. And we do budget for those unexpected expenses, so that does help a bunch.

Mostly, my EF is in case of job loss. And of course, my wife would work if she HAD to, but if I lost a job, I would get a new job earning more than she would be able to much more quickly, so it wouldn’t make sense. Sure, it’s a one-income trap, but I’ve got multiple income streams to account for that and insurance to protect against anything that could stop me from being able to earn income (injury, disability, death). So I don’t think the principal of my wife working applies in our situation.

And for sure, being debt free would give us a few hundred more a month, lowering the need for a HUGE emergency fund, and giving us more security with the savings we already have. Definitely want to get there ASAP, but lowering our EF to $1,000 to save some money in interest is not worth the risk.

We’re probably going to opt to keep the cash we have in our EF, chunk away at the loans as much as possible over the next 7 months, and if we’re within firing distance of having them paid off, we may dip into the EF to finish them off.

Yep! I didn’t want to advise based on what I knew already from Facebook if you hadn’t announced it here… but I think the “pay all the debt!” philosophy definitely gets turned on its head when you’re pregnant. We’re just not comfortable even thinking about paying off $13k in loans until baby is here and healthy. I think you’re wise to have a bulkier EF for the same reason, not to mention being a homeowner (which we aren’t yet).

I’m in the same boat as you where I have an emergency fund that is probably a bit too much considering my own situation, along with student loans to pay off. However, I think you’re smart to save, especially with another baby on the way (congrats!). I think you should go with what makes you feel comfortable. You don’t want to have to stress that you won’t be able to afford an unexpected incident.
Like others, I’m a worrier, and I like to have that cushion *just* in case something happens. I am definitely working on getting my loans down more, though. Hopefully you’ll be an inspiration for that! $3,000 is a great start!E.M. recently posted..Saving Your Money: Why It’s Important

Normally I would say take the extra cash and pay down the loan. However, with a baby on the way I think it would be a good idea to hold off until his/her arrival just to make sure things are okay. Assuming all is well I would pay down the loan then.

I don’t think it is an “either or” question! I think you need to do all of them, although I may disagree with paying off the mortgage early. With such low interest rates, I would use the extra funds to invest instead,krantcents recently posted..4 Decisions that Will Cost You a Fortune!

I say do what you’re comfortable with, it is your PERSONAL finances after all. I’d probably keep the cash for now as well with everything that is going on!Lance @ Money Life and More recently posted..Have Times Changed? Who Should Pay For A Date?

Welp, dropped the $3k today, but hanging on to the rest of the cash until things pan out. I’d rather have cash now and delay the debt payoff a few months than not have any cash when the baby comes. But whatever’s left over, you bet your bottom dollar it’s going on the loans!

If there wasn’t a baby in the picture, then it would be “kill the debt”! When you add pregnancy, then I would have a good sized EF because I am a pessimist and my EF is extremely important to me and my plans.Grayson @ Debt Roundup recently posted..Debt Consolidation is Often Necessary When Refinancing

I guess an important question is how would paying off the loan affect your cashflow? Would it free up a huge space in your budget, or would it not make that big of a difference. If you got laid off tomorrow, would that E-fund allow you to still make the payments on the loan for a long time? I’d probably keep your E-fund where its at and start flowing more into the loan until you pay it off.thepotatohead recently posted..Mastering Craigslist: 16 Tips for Selling on Craigslist

It would free up about $220 a month. That’s not a HUGE amount, but it helps. So I am going with your suggested plan. Don’t touch the EF, put as much as we can squeeze onto the loan, and then re-evaluate after baby #2 is here 🙂

I’ve been considering lowering the amount in my emergency fund as well, as I have funding in other savings buckets that could be used in the event of an emergency. I just haven’t figured out a strategy of what I would do with that cash in a way that makes me excited, so for now it’s still there 🙂Money Beagle recently posted..What To Do About Our Cell Phone Plan?

Personally I think that the pregnancy and the fact that you are a one income household changes everything, and necessitates a larger e-fund. I think you’re making the right decision!Jordann @ My Alternate Life recently posted..I Need More Friends My Own Age

Thanks Jordann. Since there is so much unknown in the future, I’d rather plan for the worst, and then, if things are great, I can throw the extra cash at the loans and call it a day. Might lost a few dozen dollars in interest, but I’m ok with that for the sake of financial security.

I think the issue with the emergency funds nowadays is something I kind of hinted at in the last article – artificially low interest rates. Pretty much all debt is going to be higher than the .8% (minus tax) you get from the bank – that wasn’t the case a few years ago. I wouldn’t have thought twice about locking in teaser rates like 6% savings accounts. Nowadays? Meh.PK recently posted..Personal Finance 101

I’ve got the 6% on my checking and savings accounts at my local credit union, Only on the first $500 in each account, but hey, it’s paying better than anything else. The $6,100 is only getting 0.84%, but I’d rather keep that liquid, as I am not confident enough in my investing skills to try to earn a few hundred off that cash. Just not worth the risk ATM.

You’re emergency fund is always relative to your own situation. I maintain a $50k emergency fund. However, with $6k per month in expenses (which I could cut back if needed), that puts me at about 8 months. I’d actually like a little more, but I do have Roths and other things I could access if needed.The College Investor recently posted..Why are Women Afraid to Invest?

$50k would be nice, but like you said, unnecessary for out situation, but necessary for yours. But 6-12 months of money saved up would be ideal, though some of it would be in taxable brokerage accounts to make my $$$ work for me a bit 🙂

Valerie, so sorry to hear about that. 🙁 . If you haven’t already (my inbox is a little backed up), shoot me an email through my Contact form, I’d love to hear more about your situation and see if I can be of assistance.

I am guilty of having a big emergency fund too. I just feel like $1,000 is not enough for an emergency! In my mind, emergencies include airlifting me to a hospital from the island or my car completely breaking 100%. I just feel like I have to have more than $1,000. Right now I have around $5,000. I’d love to pay off a chunk of my student loans, but it has taken me a while to get to that point. If I pay my student loans, I can’t get it back. That’s what scares me!Cat Alford (@BudgetBlonde) recently posted..Does Hanging Clothes On The Line Really Save You Money?

Cash now is better than debt later….if that makes sense. Keep the cash so you don’t have to go further into debt later because of an emergency. I’m totally with you!Jacob recently posted..Ultimate Budget Series: Part 2 – Tithing

We have a very large emergency fund and though I know personal finance gurus would likely scoff at the low-interest account, it makes us feel secure! Our current debts are mortgage and car loan, but we keep our credit cards at zero and I paid off my student loans a few years ago. I completely agree with your position that $6,100 isn’t an over-the-top amount for a family of three – soon to be four – with one income. It sounds like you have the motivation to meet your goals. Keep it up and congrats!Kendal @HassleFreeSavings recently posted..7 Ways to Save at the Movies

What a cute baby annoucement! Congratulations! I’m in a similar boat. I have less than $500 to pay on my car, and I don’t start owing on my mortgage until July, so I feel RICH. It’s really tempting to just pay off that car loan so I can experience “freedom” (though not really since I signed my life away!) but then there are all the other costs associated with moving. AND THEY DON’T STOP!Kathleen recently posted..Coupon Chief Site Review Plus $50 Old Navy Giveaway!

My husband and I are both self-employed and our monthly nut (including taxes) is about $7250, so we have $20,000 of cash on hand at all times and are growing that to $30,000 to just be on the safe side. So I don’t judge your size fund at all, lol. It’s whatever makes you feel secure…Crystal @ Prairie Ecothrifter recently posted..Ways to Build Credit Without Relying Solely on Credit Cards

You guys are awesome and congrats! See what I miss when I miss a day?! I completely agree with you, a $1,000 ER fund really isn’t enough – it’s a good start, but not enough to rely on if a true emergency hit. I think it’s terrific to be in a position where your ER fund is TOO big. I wish I was in that position. 😉Little House recently posted..DIY Furniture Projects

Great post, Jacob! I’ve been meaning to get over here and check you guys out, since I’ve heard so many awesome things. Congrats on the second baby, too! I think you’ve got the right thoughts about keeping the emergency fund larger, especially since your wife is working at home with the kiddo(s). Sounds like taking just some of the reserve and paying off debt is a great way to go.Laurie @thefrugalfarmer recently posted..How Debt Mimics Life

Our emergency fund was sitting at $20K but we just took money out to pay cash for a new truck for hubby. We are currently trying to sell the other one. Once we do, we will be around the same amount. I like having a large emergency fund because we live mainly on one income. I don’t want to panic if my husband gets laid off. 🙂 Cute baby announcement by the way!!Stephanie@Mrs.Debtfighter recently posted..2014 Goals

Jacob, rules of thumb are not absolute, they are merely guidelines and cannot cover all situations. You have made the right choice to keep your liquidity high for unknown events and emergencies. As you are young you still have time to save for the future. But having a strong stash is your highest priority now especially with #2 baby on the way. You have really thought this through and it looks like you are doing the right thing.STEVEN J. FROMM, ATTORNEY, LL.M. (TAXATION) recently posted..Small Businesses: 8 Great Year-End Tax Planning Tips and Tricks: A Must Read

I did everything in the wrong order. I paid off a small student loan, bought a house, paid it off with zero emergency fund. Then I started to invest, and bough a much bigger house, committed financial suicide by buying some new cars along the way with financing. But eventually I smartened up, paid everything off, now saving at a 50% rate or so, and I’ve managed to build my emergency fund to 32k for the first time in my life. But I was lucky in that between my wife and I, we will get 2 good company pensions, which are quite important when you start thinking about retiring. But I’m impressed with what you are doing, and I think that your emergency fund should be set by your own feelings of security or insecurity, since you know your situation much better than anyone else. I couldn’t even track my spending until I noticed the pivot table feature of Excel, and learned how to suck the information out of my credit union. [now I have an awesome system though]

My family currently has about 5 months take-home-pay EF which I could probably stretch into a 6 months expenses EF. My ultimate goal is to have us at 1 year salary EF. As long as the paychecks continue, I do not see us stopping contributing to our EF. Although as of right now the contributions are pretty small. We are a single income household and I think it should be every single income family’s goal to have a 1 year EF (expenses vs. take home pay vs. salary is up to you). And this is in addition to our sinking funds (car repair, house repair, etc.)

So to answer your question, I do not think you have a large EF, in fact I would say it is small. But I’m conservative about EFs like that.

I hear you. We are also a single-income household, and honestly I would love a larger EF, but there’s still the lingering student loans, I want to throw all extra cash that way first. And for me, I’m going to probably have 3 months’ EF in cash, and the rest working for me in an index fund 🙂

Hi there. New reader. I’m a married mom of two small kids. I work FT. No debts besides the mortgage. We have $25K in an EF. May seem high but our mortgage payment and cost of living are high in Calgary, Canada. I also consider it my F-U money if I ever want to quit my job. (Husband is self-employed). It’s so empowering having this much of a cushion. I feel in control. Recommend it to everyone!

Totally agree with this. I am 30 years old and believe it or not, I have 22k emergency fund, no kids, no debt, no mortgage (I own my condo), no car payment. Basically, for the last 5 years I continued to live like I did in undergrad: Didn’t eat out, low entertainment cost, and I even went to frat parties etc. It’s done me well and I have complete peace of mind.

It’s personal preference really. Some people choose to use a HELOC as an emergency fund, I personally think that’s crazy because a bank can cancel or reduce your HELOC at any time. On the other side of the spectrum is where I’d prefer to reside. A bigger than average emergency fund is something I’d like to have in the future. Right now we have a bit, but we’re working to make it bigger. Ideally 6-12 months expenses.Thomas recently posted..Make Money Online Now With These 9 Websites

I just came across your blog and wanted to say kudos on being on the right track!! Here’s some food for thought for you. What about using some of your EF and paying ahead on your mortgage? My husband and I decided to pay 3 months ahead on our mortgage. (meaning, making 3 consecutive minimum payments instead of paying extra towards the balance). Right now it’s mid-February but we don’t have a payment due until June 1st. This serves two purposes: one, it’s a 3 month cushion on your house payment, should something happen; and two, it lowers your principal a wee bit faster. That way the money is not sitting in your EF languishing, earning no interest but rather it’s been put to good use.

Not a bad idea, as it essentially frees you up from the most expensive monthly payment if you need to scale back a bit. For me, I like cash NOT tied up in anything, but I think the net-net is the same.

Also, I love being a month ahead on my budget, meaning I have ALL the money for each month at the beginning of the month.

[…] Jacob from iHeartBudgets wrote a great piece this week explaining why he chooses to keep several thousand dollars in a savings account when he still has over $13,000 in student loans at 6% interest. You can read it yourself here: Is My Emergency Fund Too Big? […]

Meet Jacob

I'm a husband, father, and budget nerd who loves taking complex financial problems and breaking them down into a simple, easy-to-follow financial plan. It all started after getting engaged over 6 years ago... Read More…

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Information presented on iHeartBudgets is intended for informational purposes only and is not meant to be taken as financial advice. While all attempts are made to present accurate information, it may not be appropriate for your specific circumstances and information may become outdated over time. I am not a personal finance professional and you should seek out a professional before making any financial decisions.